BILL ANALYSIS                                                                                                                                                                                                    Ó



                                                                    SB 1226


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          Date of Hearing:   June 28, 2016


                        ASSEMBLY COMMITTEE ON HUMAN SERVICES


                                Susan Bonilla, Chair


          SB  
          1226 (Beall) - As Amended March 28, 2016


          SENATE VOTE:  39-0


          SUBJECT:  Regional centers:  audits and reviews


          SUMMARY:  Requires regional centers to submit, and the  
          Department of Developmental Services (DDS) to review and report  
          on, all vendor independent audit reports.  


          Specifically, this bill:  


          1)Requires a regional center to submit copies of all independent  
            audit reports received to the DDS for review.  


          2)Requires DDS to analyze independent audit reports submitted by  
            regional centers to determine if they are effective in  
            preventing fraud and improving accounting practices among  
            entities that receive regional center funding and further  
            requires DDS to report its findings to the Legislature on a  
            biannual basis, as specified.










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          EXISTING LAW:   


          1)Establishes the Lanterman Developmental Disabilities Services  
            Act (Lanterman Act), providing an entitlement to services for  
            individuals with developmental disabilities.  
            (WIC 4500 et seq.)





          2)Grants all individuals with developmental disabilities, among  
            all other rights and responsibilities established for any  
            individual by the United States Constitution and laws and the  
            California Constitution and laws, a number of rights,  
            including the right to treatment and habilitation services and  
            supports in the least restrictive environment.  (WIC 4502)



          3)Establishes a system of nonprofit regional centers throughout  
            the state to identify needs and coordinate services for  
            eligible individuals with developmental disabilities and  
            requires DDS to contract with regional centers to provide case  
            management services and arrange for or purchase services that  
            meet the needs of individuals with developmental disabilities,  
            as defined.  (WIC 4620 et seq.)

          4)Requires the development of an individual program plan (IPP)  
            for each regional center consumer, which specifies services to  
            be provided to the consumer, based on his or her  
            individualized needs determination and preferences, and  
            defines that planning process as the vehicle to ensure that  
            services and supports are customized to meet the needs of  
            consumers who are served by regional centers.  (WIC 4512)











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          5)Creates a process by which regional centers may "vendorize"  
            service providers, thereby providing a path to contract for  
            services with that provider and ensuring maximum flexibility  
            and availability of appropriate services and support for  
            persons with developmental disabilities.  (WIC 4648) 



          6)Authorizes regional centers to solicit an individual or agency  
            through a request for proposals or other means to provide  
            needed services or supports not presently available, provided  
            it is necessary to expand the availability of needed services  
            of good quality.  (WIC 4648(e)(1))



          7)Requires regional centers to provide the consumer, his or her  
            parent, legal guardian, or other appropriate authorized  
            representative, as specified, at least annually, a statement  
            of services and supports the regional center purchased, for  
            the purpose of ensuring that the services are delivered.  (WIC  
            4648(h)) 

          8)Authorizes DDS and regional centers to monitor services and  
            supports purchased for regional center consumers without prior  
            notice, as specified, and authorizes DDS to conduct fiscal  
            reviews and audits of service providers' records.  (WIC  
            4648.1(a))



          9)Requires that DDS and regional center staff involved in  
            monitoring or auditing services provided to regional center  
            consumers be granted access to a provider's grounds,  
            buildings, service program, and all related records and  
            documentation, as specified.  (WIC 4648.1(b))











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          10)Requires that an entity receiving payments from one or more  
            regional centers contract with an independent accounting  
            firm for an audit or review of its financial statements  
            subject to all of the following: 

             a)   When the amount received from the regional center or  
               regional centers during the entity's fiscal year is more  
               than or equal to $500,000 but less than $2 million, the  
               entity shall obtain an independent review report of its  
               financial statements for the period.  This includes work  
               activity program providers receiving less than $500,000,  
               as specified; and

             b)   When the amount received from the regional center or  
               regional centers during the entity's fiscal year is equal  
               to or more than $2 million, the entity shall obtain an  
               independent audit of its financial statements for the  
               period.  (WIC 4652.5 (a)(1))


          11)Excludes certain payment types, as specified, from  
            consideration and exempts state and local governmental  
            agencies, the UC and CSU university systems from the audit and  
            review requirements.  (WIC 4652.5(a)(2) and (a)(3))

          12)Requires vendors to provide copies of the independent audit  
            or review reports, and accompanying management letters, to the  
            vendoring regional center within nine months of the end of the  
            vendor's fiscal year.  (WIC 4652.5(b))

          13)Requires regional centers to review the audit and review  
            reports and require resolution of issues identified in the  
            report that have an impact on regional center services, and to  
            take appropriate action, which may entail termination of  
            vendorization, for lack of adequate resolution of issues.   
            (WIC 4652.5(c))

          14)Requires regional centers to notify DDS of all qualified  








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            opinion reports or reports noting significant issues that  
            directly or indirectly impact regional center services within  
            30 days after receipt, and requires the notification to  
            include a plan for resolution of issues.  (WIC 4652.5 (d))

          15)Specifies that an independent review of financial statements  
            must be performed by an independent accounting firm and  
            requires the review to include, at a minimum: 

             a)   An inquiry as to the entity's accounting principles and  
               practices and methods used in applying them;

             b)   An inquiry as to the entity's procedures for recording,  
               classifying, and summarizing transactions and accumulating  
               information;

             c)   Analytical procedures designed to identify relationships  
               or items that appear to be unusual;

             d)   An inquiry about budgetary actions taken at meetings of  
               the board of directors or other comparable meetings;

             e)   An inquiry about whether the financial statements have  
               been properly prepared in conformity with generally  
               accepted accounting principles and whether any events  
               subsequent to the date of the financial statements would  
               have a material effect on the statements under review; and

             f)   Working papers prepared in connection with a review of  
               financial statements describing the items covered as well  
               as any unusual items, including their disposition.  (WIC  
               4652.5(e))

          16)Specifies that the independent review report shall cover, at  
            a minimum, all of the following:

              a)    Certification that the review was performed in  
                accordance with standards established by the American  
                Institute of Certified Public Accountants;








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              b)    Certification that the statements are the  
                representations of management;

              c)    Certification that the review consisted of inquiries  
                and analytical procedures that are lesser in scope than  
                those of an audit; and

              d)    Certification that the accountant is not aware of any  
                material modifications that need to be made to the  
                statements for them to be in conformity with generally  
                accepted accounting principles.  (WIC 4652.5(f))

          17)Prohibits DDS from considering requests for adjustments to  
            rates submitted by an entity receiving regional center  
            payments solely to fund either anticipated or unanticipated  
            changes required for an entity to comply with the audit or  
            review requirements, as specified.  (WIC 4652.5(g))

          18)Requires every charitable corporation, unincorporated  
            association, and trustee required to file reports with the  
            Attorney General, as defined, that receives or accrues in any  
            fiscal year gross revenue of two million dollars ($2,000,000)  
            or more, exclusive of grants from, and contracts for services  
            with, governmental entities for which the governmental entity  
            requires an accounting of the funds received, to obtain an  
            annual financial audit, as defined, and requires the audited  
            financial statements to be available for public inspection no  
            later than nine months after the close of the fiscal year to  
            which the statements relate, as defined.  (GOV 12586 (e)(1))

          19)Requires a regional center to audit records of service  
            providers, as specified, to the extent the regional center  
            determines it is necessary.  (California Code of Regulations  
            Title 17 §50606)



          FISCAL EFFECT:  According to the April 25, 2016, Senate  








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          Appropriations Committee analysis, this bill may result in  
          ongoing costs of $110,000 per year for an additional auditor  
          position at DDS to review audit reports and report to the  
          Legislature (70% General Fund, 30% federal funds).


          COMMENTS:  


          Developmental services:  Developmental disabilities are  
          disabilities that originate before an individual attains 18  
          years of age and that are expected to continue indefinitely as a  
          substantial disability for that individual.  Developmental  
          disabilities include intellectual disabilities, cerebral palsy,  
          epilepsy, and autism spectrum disorders, as well as those  
          disabling conditions similar to an intellectual disability that  
          require care and management similar to that required by  
          individuals with an intellectual disability.  





          Guidance for the delivery of services and supports to  
          Californians with developmental disabilities is found in the  
          Lanterman Act (WIC § 4500 et seq.).  This Act entitles  
          individuals with developmental disabilities (often referred to  
          as "consumers") to treatment and habilitation services and  
          supports in the least restrictive environment; services are  
          designed to enable all consumers to live more independent and  
          productive lives in the community. 





          The developmental services system is administered by DDS and a  
          network of 21 regional centers across the state, which are  
          private nonprofit entities established pursuant to the Lanterman  








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          Act, that contract with DDS to carry out many of the state's  
          responsibilities under the Act.  These 21 regional centers serve  
          over 300,000 consumers, providing services such as residential  
          placements, supported living services, respite care,  
          transportation, day treatment programs, work support programs,  
          and various social and therapeutic activities.  Another  
          approximately 980 consumers live at one of California's three  
          Developmental Centers-and one state-operated, specialized  
          community facility-which provide 24-hour habilitation and  
          medical and social treatment services.





          Individuals with developmental disabilities receive services  
          that are outlined in an individual program plan (IPP) which is  
          based on that individual's needs and choices and is developed by  
          an IPP team that includes, among other individuals, the  
          consumer, his or her legally authorized representative, and one  
          or more representatives from the regional center.  The Lanterman  
          Act requires that the IPP promote community integration and  
          maximize opportunities for each consumer to develop  
          relationships, be part of community life, increase control over  
          his or her life, and acquire increasingly positive roles in the  
          community.  The IPP must prioritize those services and supports  
          that allow minors to live with their families and adults to live  
          as independently as possible in the community. 





          Vendorization of community-based services:  The 21 regional  
          centers receive an operations budget from DDS to carry out  
          activities related to eligibility determination and development  
          of IPPs.  Regional centers also receive funds to purchase over  
          150 different types of services from vendors; services and  
          supports are aimed at supporting individuals to live in the  








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          community and can include in-home care, housing, transportation,  
          activity programs, and employment programs.  (Regional centers  
          are the payer of last resort and therefore typically pay for  
          services only in instances where a consumer does not have  
          private health insurance or cannot be referred to "generic"  
          services; the majority of regional center consumers are enrolled  
          in Medi-Cal.)





          "Vendorization" is the process by which service providers are  
          identified, selected, and utilized, based on qualifications and  
          requirements, to provide services to consumers.  Through this  
          process, regional centers are able to verify that an applicant  
          vendor complies with all necessary requirements and regulations  
          prior to providing services; the regional center with the  
          catchment area in which the service is located vendors that  
          services provider.  The vendoring regional center is then  
          responsible for verifying that the applicant vendor meets all  
          necessary licensing, and other, requirements; the regional  
          center will also determine the appropriate vendor category for  
          the service to be provided.  If an applicant meets all necessary  
          requirements, a regional center is required to vendor that  
          applicant - however, this does not obligate the regional center  
          to purchase services from that vendor.  Other regional centers  
          are also able to utilize the services of a provider vendored by  
          another regional center.  There are currently over 44,000  
          vendors that provide services paid for by regional centers in  
          California.





          Vendor audits and reviews:  In August 2010, the California State  
          Auditor's Office released a report entitled, "Department of  
          Developmental Services:  A More Uniform and Transparent  








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          Procurement and Rate-Setting Process Would Improve the  
          Cost-Effectiveness of Regional Centers."  This report found,  
          among other things, that regional centers were not appropriately  
          monitoring expenditures of vendors and that they did not always  
          document why certain vendors were selected, how rates were set,  
          or how contracts were procured.  This report brought about  
          heightened interest in oversight of vendor expenditures.
          
          SB 74 (Senate Committee on Budget and Fiscal Review), Chapter 9,  
          Statutes of 2011, adopted, among other things, audit  
          requirements for regional center vendors.  Those vendors  
          receiving between $250,000 and $499,999 in annual regional  
          center funding were required to obtain an independent audit or  
          independent review report of their financial statements for the  
          fiscal year, with some exceptions.  Those vendors receiving  
          $500,000 or more annually did not have the option of submitting  
          to a less-stringent independent review and instead were required  
          to obtain an independent audit report.  These new audit and  
          review requirements were envisioned to bring about savings  
          (approximately 1% of regional center purchase of service costs)  
          due to the identification, and correction of, poor billing  
          practices and inappropriate spending of regional center funds;  
          DDS also indicated that these new requirements enabled the  
          department to prioritize its own audits, focusing on those  
          vendors who had issues needing addressed.

          Recent legislation - ABX2 1 (Thurmond), Chapter 3, Statutes of  
          2016 - changed some of these audit and review requirements.  In  
          June 2015, the Governor convened a special legislative session  
          to address, among other things, funding rate increases for  
          community service providers of services for individuals with  
          developmental disabilities.  One result of that special session  
          was the passage of ABX2 1, signed by the Governor on March 1 of  
          this year, which appropriated $287 million General Fund to  
          regional centers and community services providers in 2016-17 in  
          additional to leveraging an estimated $186 million in federal  
          funding.  Among the changes adopted by this bill were changes to  
          vendor audit requirements.  ABX2 1 raised the dollar thresholds  
          triggering reviews and audits, and removed the option for  








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          vendors in the lower tier to obtain independent audits, instead  
          only requiring independent review reports; now, those vendors  
          receiving between $500,000 and less than $2 million in annual  
          regional center funding are required to obtain an independent  
          review report, and those vendors receiving $2 million or more  
          annually must obtain an independent audit report (these vendors  
          are also now able to apply for a two-year exemption from the  
          audit requirement).  The 2016-17 State Budget includes $1.0  
          million ($0.7 million of which is General Fund) to permanently  
          establish within DDS and retain funding for seven limited-term  
          auditor positions in the Vendor Audit Section.

          While independent review reports are similar to audits, they are  
          substantially smaller in scope and do not result in an opinion  
          being issued; the purpose of the review is to analyze an  
          organization's financial data and gather information from its  
          management in order to express limited assurances that the  
          organization is in conformity with Generally Acceptable  
          Accounting Principles (GAAP).  The review results in a Certified  
          Public Accountant either issuing a clean report or issuing no  
          report due to needed modifications.

          Audit reports are completed by independent accounting  
          professionals in order to assess the financial status and  
          stability of an organization, and whether financial records have  
          been maintained in accordance with GAAP.  An audit can result in  
          any one of the following opinions:



             a)   An unqualified opinion, also known as a "clean" or  
               "unmodified" opinion, is the best possible opinion to  
               receive as the result of an audit.  It is issued when it  
               has been determined that an organization's financial  
               records are presented fairly and free of any  
               misrepresentations; this type of opinion also indicates  
               that the financial records have been maintained in  
               accordance with GAAP;  









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             b)   A qualified opinion is issued when no misrepresentations  
               are identified, but an organization's financial records  
               have not been maintained in accordance with GAAP; this type  
               of opinion indicates the reason that the audit report is  
               not unqualified;

             c)   An adverse opinion is issued when it is determined that  
               the audited financial statements do not fairly represent  
               the organization's financial position and do not adhere to  
               the GAAP.  Often, an auditor will work with the  
               organization to resolve or correct issues so the published  
               audit opinion can be either qualified or unqualified; or

             d)   A disclaimer of opinion is provided when an auditor  
               chooses not to issue an opinion, due to significant  
               uncertainties in the appropriateness of the materials,  
               significant limitations in the scope of the audit, or if  
               the auditor feels he or she cannot complete an impartial or  
               independent audit of the organization. 

          According to a survey conducted by the Association of Regional  
          Center Agencies (ARCA) in April 2015, an average of 52% of  
          vendors complied with audit requirements; of those complying,  
          99% had unqualified opinions.  According to the sponsors of this  
          bill, financial review costs can range from $2,000 to $4,000,  
          while the cost for impacted vendors to have an audit conducted  
          is often between $6,000 and $14,000. 
           


          Need for this bill:  According to the author, "[This bill] helps  
          address a primary concern about the SB 74 audit requirements-  
          they are a burdensome cost to vendors and are not an effective  
          way to identify fraud.  Because the cost to perform audits and  
          financial reviews are borne by vendors and reducing fraud is  
          important, it is critical for the Legislature to understand if  
          the audits are accomplishing what they were intended to do or if  
          they are a waste of money.  With [this bill], vendors can focus  
          on providing core services to those in need."








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          ResCoalition, the sponsor of this bill, states that:


            "The Department of Developmental Services (DDS) passed a  
            trailer bill as part of SB 74, labeled RC audits.  In public  
            testimony, DDS indicated this was in an effort to remedy the  
            concerns of a Bureau of State Audits (BSA) audit of the  
            Regional Center (RC) system that found a number of  
            deficiencies.  However the BSA audit was of RC's, not vendors  
            and there was no recommendation that vendors get audited.   
            Despite this, the measure passed with vendor audits included  
                                                                                  and a new, costly and confusing audit process is burdening the  
            system with little or no redeeming value.


               


            While we have been successful in making some changes via ABX2  
            1, significant concerns still exist.  Some issues with the  
            above requirements include:





                 Thresholds do not meet industry standards;

                 Small vendors have been pushed into the next threshold  
               with just the minimum wage increase and/or the return of  
               the 4.25% temporary funding cut;





                 Ignores normal and typical business practices of small  








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               business, not accrual basis;

                 Consequences vary between each RC; and





                 Prohibitive costs to implement but no tangible outcomes.



            [This bill] seeks to get the Department of Developmental  
            Services to assess the effectiveness of the continued mandate  
            for fiscal audits, considering the department has acknowledged  
            they have not achieved the intended or desired outcomes."





          Opposition:  Writing in opposition to the bill, DDS states the  
          following:


            "[This bill] would require that a regional center submit to  
            DDS all service provider independent audit reports it receives  
            for DDS' analysis and determination of whether the audits are  
            effective in preventing fraud and improving service provider  
            accounting practices.  The bill would require DDS to report  
            its findings to the Legislature twice per year.  The  
            independent audits required by statute, however, are not  
            intended to detect fraud and the reports that DDS would be  
            required to review do not include sufficient information to  
            determine if the audits are effective in reducing fraud or  
            improving accounting practices.  


            An audit report is completed by an independent account  








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            professional to express an opinion on the financial statements  
            of a business or company.  It considers a company's assets and  
            liabilities, and reviews whether financial records have been  
            maintained in accordance with General Accepted Accounting  
            Principles (GAAP).  Independent audits test and evaluate  
            internal controls but are not designed to find or even prevent  
            fraud.  Consequently, if the reported figures were apparently  
            correct, an independent auditor could issue a clean,  
            'Unqualified Audit Opinion,' despite the existence of fraud.   
            The scope of an independent review is substantially less than  
            that of an independent audit and can only provide 'limited  
            assurance,' and no opinion is expressed by the reviewer  
            regarding the financial statements.  A review includes  
            primarily applying analytical procedures to management's  
            financial data and making inquiries of management; it does not  
            include review of supporting evidence or the evaluation of  
            internal controls.  


            The purpose of [this bill] is to enable the Legislature to  
            understand if audits are effective in reducing fraud and  
            improving account practices.  Because of the nature of  
            independent audits, however, DDS would be unable to provide  
            the Legislature with the information needed to accomplish this  
            goal."


          Staff comments:  DDS is not able to track the impact of the  
          audit and review requirements on cost savings to the state, nor,  
          per the department's opposition to this bill, are the audits  
          able to be used to detect fraud.  The limited scope of, and  
          benefits resulting from, these audits and reviews does raise  
          questions about their usefulness.  However, this is not an  
          argument for completely eliminating what current transparency  
          and oversight do exist.  Instead, the committee may wish to, as  
          discussions around rate-setting and rate methodologies continue  
          between the Legislature and the Administration, examine  
          approaches to improving audit standards for developmental  
          services in a way that enhances the usefulness of the results  








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          and transparency and efficiency of the developmental services  
          system.


          Recommended amendments:  DDS states that it is impossible to  
          detect fraud using the current audit reports, which were not  
          designed for this purpose.  In order to ensure that reporting  
          responsibilities required of the department are achievable, and  
          to acquire a statewide picture of the compliance with audit  
          requirements and results of the audits and make this publicly  
          available via DDS's performance dashboard, committee staff  
          recommends the following amendments starting on line 34 of page  
          3 of the bill: 


              34


            (2)A regional center shall submit copies of all independent 
              35


          audit reports that it receives to the department for review. The  

              36


          department shall  compile data, by regional center, on vendor  
          compliance with audit requirements and opinions resulting from  
          audit reports and shall annually   analyze the reports to  
          determine if they are 
               37


           effective in preventing fraud and improving accounting practices  

               38










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           among entities that receive payments from one or more regional 
               39


           centers. The department shall biannually report   publish these  
          data in the performance dashboard pursuant to Section 4572.   its  
          findings to the  
          P4     
               1


           Legislature. These reports shall be submitted pursuant to  
          Section 
                2


             9795 of the Government Code.
           


          In order to more readily identify vendors that must submit  
          review or audit reports, and to facilitate consistency in  
          submission of those reports, committee staff also recommends  
          amending the bill to: 1) specify that, as of January 1, 2018,  
          the amount of money a vendor receives from a regional center in  
          the state's, versus an entity's, fiscal year shall be used to  
          determine if a vendor needs to submit a review or audit report;  
          and 2) require, as of January 1, 2018, review and audit reports  
          to be submitted to the vendoring regional center within nine  
          months of the end of the state fiscal year, versus the end of  
          the entity's fiscal year.  


          PRIOR LEGISLATION: 


          ABX2 1 (Thurmond), Chapter 3, Statutes of 2016, among other  
          things, raised the dollar thresholds triggering reviews and  
          audits, respectively, and removed the option for vendors in the  








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          lower tier to obtain independent audits, instead only requiring  
          independent review reports.


          SB 490 (Beall), 2015, would have increased audit and financial  
          review thresholds for regional center vendors.  It was held on  
          the Assembly Appropriations Committee suspense file.


          SB 74 (Committee on Budget and Fiscal Review) Chapter 9,  
          Statutes of 2011, established vendor audit and review  
          requirements, among other provisions.


          REGISTERED SUPPORT / OPPOSITION:




          Support


          The ResCoalition, sponsor


          The Alliance




          Opposition


          Department of Developmental Services (DDS)




          Analysis Prepared by:Daphne Hunt / HUM. S. / (916)  








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          319-2089